## Facts

- New York resident Joseph Rice created an inter vivos trust for the benefit of his children.
- The trust was governed by New York law, and the trustee (a New York resident) had absolute discretion over whether, when, and how much to distribute to the beneficiaries.
- No beneficiary lived in North Carolina when the trust was created, but Rice’s daughter, Kimberly Rice Kaestner, later moved to North Carolina.
- After Kaestner moved, the trustee divided the original trust into subtrusts, including the “Kimberly Rice Kaestner 1992 Family Trust,” naming Kaestner and her children as beneficiaries and operating under the original trust agreement.
- During the tax years 2005–2008, the trust’s documents and records were kept in New York, the custodians of the trust’s assets were in Massachusetts, and the trust made no direct investments in North Carolina.
- The trust had no physical presence or real property in North Carolina, and it was administered outside the state.
- Between 2005 and 2008, the trustee made no distributions to Kaestner or her children.
- North Carolina assessed income tax of more than $1.3 million on the trust’s accumulated, undistributed income under a statute authorizing taxation of trust income “that is for the benefit of a resident of this State.”
- The trustee paid the tax under protest and sued the North Carolina Department of Revenue for a refund, arguing that North Carolina lacked the minimum connection required by the Fourteenth Amendment’s Due Process Clause.
- The trust prevailed in North Carolina trial and appellate courts; the North Carolina Supreme Court affirmed, and the U.S. Supreme Court granted certiorari.

## Issues

1. Whether the Fourteenth Amendment’s Due Process Clause permits a state to tax an out-of-state trust’s undistributed income based solely on the in-state residence of trust beneficiaries who received no distributions and had no right to demand them.
2. What relationship between a resident beneficiary and the trust property is required to supply the “minimum connection” needed for a state to tax undistributed trust income on a beneficiary-residence theory.

## Decision

- The Supreme Court unanimously held that North Carolina’s tax, as applied to the Kaestner trust’s undistributed income for 2005–2008, violated the Due Process Clause.
- Beneficiary residence alone did not supply the required connection to tax trust income that was not distributed where the beneficiaries lacked any right to demand the income and might never receive it.
- The Court affirmed the judgment of the North Carolina Supreme Court.

## Legal Principles

- Due process limits state taxing authority to taxes that bear a fiscal relationship to protections, opportunities, and benefits provided by the state.
- For a state tax to satisfy due process, there must be “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” and the income attributed to the state must be rationally related to values connected with the taxing state.
- When a state bases a tax on a trust’s income on the residence of a beneficiary, due process requires that the resident beneficiary have some degree of possession, control, or enjoyment of the trust property, or a right to receive that property.
- A beneficiary’s residence, without distributions and without any enforceable right to demand trust income, is too attenuated a connection to support taxing the trust’s undistributed income.
- The holding was limited to the circumstances presented and did not adopt a categorical rule about all trust taxation based on beneficiary residence; other contacts (such as in-state trustees, administration, or trust property) could change the analysis.

## Conclusion

Because North Carolina’s only asserted connection to the trust’s undistributed income was the in-state residence of discretionary beneficiaries who received nothing and had no right to compel distributions, the State lacked the minimum connection required by due process to impose the tax, so the assessment was unconstitutional as applied.


North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, 588 U.S. 262, 139 S. Ct. 2213 (2019)